10 steps to paying down debt

Facing overwhelming payments? Tackle your debt with a plan

By Shelley White, Toronto Star

When Eddie Kadic graduated from Toronto’s Sheridan College, he had a brand-new marketing diploma. But he also had $9,000 in credit card and student loan debt.

“After having it sitting there for years – and it’s not moving anywhere because you’re making minimum payments – you begin to think, ‘If I want to buy a home one day, if I want to finance a car, how am I going to do it?'” says Kadic.

“It was a bit of a panic mode for me, ” he says.

With income from a new full-time job and some serious self-discipline, Kadic paid off his debt in a year and a half (and documented the process on his blog FinanceFox.ca ). Now he’s starting to save for his retirement.

Can you make like Kadic and get rid of your own mountain of debt? Here are 10 ways to take control:

1. Assess your situation

The first step toward debt reduction is taking an honest look at what you owe, says Laurie Campbell, CEO of Credit Canada Debt Solutions, a non-profit credit counselling service based in Toronto. Figure out what you owe, what the interest rates are and what the terms of repayment are so you can have a tally of where you are.

“Many people come into our agency – they haven’t opened up their bills – and the debt counsellor will say, ‘This is your outstanding debt, ‘ and they just about fall off their chairs, ” says Campbell. “They had no idea.”

2. Set goals

Before you embark on any aggressive debt repayment plan, says Campbell, take some time to figure out your short, medium and long-term financial goals.

“In one year you may want to pay off all your debt. In two years, you may want to buy a car. In three years, maybe a house, ” she says. “Without having solid goals, there’s no reason to pay it all off.”

3. Create a household budget

Once you’ve determined how much it is that you owe, you need to identify all your monthly expenditures, says Victor Fong of Fong and Partners Bankruptcy Trustees in Toronto. Create a household budget to see how much you have to spend on basic living costs like mortgage, utilities and food, and subtract that from your monthly income.

4. Curb your spending

Take a look at where you’ve been wasting money and see what little changes you could make to amp up your debt repayment, says Campbell. “I don’t mean you count every dime and nickel you have, but maybe you don’t buy your lunch because it’s not money you can afford to waste, ” she says.

Kadic gave himself a strict $20 lunch-buying budget for the week, took advantage of the free coffee at work and put his loose change to good use. “Every time I would go to the grocery store or return a case to the beer store, I would put the change into this jar and convert it into cash, ” he says. “That cash I would take and directly apply to debt.”

5. Stow those credit cards

Since it was your credit cards that got you into trouble in the first place, says Fong, you need to stop using them. “It means cutting them up or shredding the credit cards, except maybe one for emergencies, ” he says. “Because when you have a credit card and you’re impulsive, it’s so tempting.”

6. Learn how to say no

Creating a budget is the easy part, sticking to it is not, says Kadic. During his debt repayment journey, he decided to go 127 days without shopping. “You have to say no a lot. You have to stick to your word because you can easily fall back into (spending).”

It’s important to remember that this severe frugality isn’t forever, says Kadic, and you’ll be able to ease up when your debt is paid off.

7. Snowball your debt payments

Fong suggests tackling your highest interest debt first, because it’s the one that’s costing you the most. However, if you need a “quick win” under your belt, says Campbell, you could pay off a small debt first in order to stay motivated. It’s a strategy that worked for Kadic.

“I had one credit card that had $1,800 on it and I decided, I’m going to focus on that one. Sure, I’m going to make my minimum payments on the other ones every month and keep my credit history intact, but this is the one I’m going to snowball, ” he said.

8. Find extra sources of income

In order to repay debt as fast as possible, you might want to consider other income sources, says Fong. Take a look at your assets to see if you can part with them. “If someone has that nice stamp collection they haven’t updated in the last few years, or baseball cards, absolutely, ” he says. You might also want to consider getting a second job.

Be warned though, says Campbell, tapping into your RRSPs to pay down debt could have negative consequences. “You may be trading another type of debt for your credit card debt, because at the end of the year you’re going to have a tax bill, ” she says.

9. Consolidate your debt

One way to reduce your payments is to go to your bank and ask for a line of credit or loan to consolidate all your debts into one with a lower interest rate, says Fong.

“If someone has $10,000 in credit card debt at 20 per cent, and if they are able to pay off that credit card debt by getting a loan at 5 per cent, that would make sense, ” he says.

The big caveat is that you need to make sure you don’t go out and use those credit cards again once you’ve got a loan or line of credit in place, says Campbell. “The payment on the credit line seems small and they feel like they’re back in control, so they use their credit cards again, ” she says. “It’s like an addict saying, one drink won’t hurt.”

10. Get some help

If your debt situation seems too overwhelming to deal with alone, there are ways to get help, says Campbell. A non-profit credit counselling service can help you with “goal-setting, budgeting, money-management strategies, all those things you don’t often get from your bank or your financial planner, ” she says.

Credit counsellors can put you on a debt-management plan, which means contacting your creditors and getting them to reduce the interest you’re paying, says Fong. “Under a debt-management plan, you’ll have up to 60 months to pay off your debt, ” he says.

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